Zombie companies: they're nothing but a bad dream

Pundits say weak 'zombie' companies are sapping the economy of its lifeblood - but Max Firth argues that there's little evidence they even exist.

by Max Firth

Published: 20 Aug 2013

Last Updated: 20 Aug 2013

Reading the financial press over the last six months, you could be forgiven for thinking an army of blood-thirsty 'zombie' companies is sucking the lifeblood out of the British economy.

'Zombies' are classed as struggling businesses making just enough money to pay interest on their debts, but not enough to pay off loans or invest. The theory goes that other organisations are reluctant to extend credit or business to them just in case some of these zombies go under – meaning growing companies are also trapped in this cycle.

According to some reports, there are as many as 160,000 of these business ‘corpses’ being kept from the grave by low interest rates and patient tax authorities.

But what is the true picture here? Is a small group of companies really responsible for holding back economic recovery? Or are there other forces at work?

At Experian, we gather and analyse vast amounts of business data drawn from many different sources - and looking at the data over the last few years, I don't believe the zombie argument stacks up.

Over the last decade we have seen a substantial clear-out of the weakest companies in the UK. Business numbers fell by about 7% when the downturn hit in 2008, a reduction not experienced in decades. At this time, the business population was much larger than it had been in the post-recession 1990s, as we increasingly became a nation of entrepreneurs and micro businesses.

So why do people believe zombies exist at all? The problem for analysts and commentators is it’s not necessarily obvious when a company has actually become insolvent, leading people to believe there are many more weak companies out there than is the case.

At first glance there’s a relatively low level of overall company insolvencies; the figure has been much lower than the rate during the recession of the 1990s. This might seem to indicate lurking zombie companies - but in reality it’s an inaccurate representation.

While the majority of micro businesses found their way through the downturn, some simply shut up shop. Officially, these are recorded as dissolutions, implying the business was solvent and left no bad debt behind, but our analysis reveals many to have been 'hidden insolvencies' – in other words, they had negative net worth (i.e. debts exceeding the value of company assets) before they closed down. Between 2008 and 2009, we predict there were tens of thousands hidden insolvencies, with hundreds of millions of pounds of likely bad debt. If you add these companies to the 'official' insolvency figures, then it alludes to an even bigger clear out at the start of the financial crisis.

The important point here is that this clear-out was mainly among companies that were weak and vulnerable in terms of debt. In other words there is no evidence of these so-called zombie companies left over from the recession.

Our data shows that the survivors are now more robust than ever, and once again we are seeing more businesses being created than are closing. The overall business stock is now greater than it was before the downturn and overall start-up and closure rates are now similar to the early 2000s.